- Hard currency is not always available on the auction and this has seen a backlog arise.
- Firms are looking to the parallel market to source hard currency to sustain their operations.
- Exchange rates on the parallel market range between ZWL$ 170 to ZWL$ 200 whereas on the auction the exchange rates are circa ZWL$ 105.
Zimbabwe’s minister of finance and economic development delivered his national budget statement for 2022 on November 25, 2021.
There are always great expectations generally when the head of national treasury takes the podium to table his plans for the country’s finances for the coming year. In Zimbabwe’s case is no different for the year 2022 citizens had been waiting with bated breath.
The budget presents an overall synopsis of the state of the country’s economy, amendments to tax, distribution of revenue across spheres of government and the distribution of expenditure across national departments.
Budgets are necessary because no country has unlimited resources. This reality gives rise to the need for responsible governments to develop budgets to allocate limited resources to where they are needed the most and where they will derive the greatest benefit.
Ideally, the budget must be aligned strongly with the country’s constitution. The budget provides the government with the financial resources it needs to deliver on its policies and run vital services in areas such as health, education, and defence.
Therefore, the national budget statement is important to all citizens because it impacts their everyday lives directly. The budget statement came against a background of expectations from various expectations from Zimbabwean people which include broadly, the protection of earnings and improvement of the local currency’s buying power.
Underlying these broad expectations are more extensive and detailed issues that need attention to improve the lives of people. One state publication put the matter this way, “…Ordinary people hope today’s budget will confront sustainable measures that help insulate the local currency from erosion, improving buying power by protecting earnings from inflation, ensure stability on the macroeconomic front and greater support for those who rely on the informal economy.”
Earnings protection and improvement of buying power are thematic of inflation which has remained stubbornly high.
These issues have continued to take centre stage, remaining in the fore because Zimbabwe’s economy consists of 2 distinct parts structurally, the formal and the informal. This is because of the advent of hyperinflation and the significant devaluation of the ZWL$ (which continues to this day) following its reintroduction to circulation in 2019.
There have been several monetary interventions that have resulted in distortions in taxation. Additionally, the dual nature of the economy along the formal and informal lines is further compounded using the local currency and the United States dollar for settling transactions.
This is a problem because citizens generally have little to no confidence in the local currency and continue to demonstrate a preference for hard currency.
This is shown in the manner that firms price their goods and services. Prices are indexed in US dollars which means that even though prices are reflected in local currency they are calculated according to what the price would be in hard currency multiplied by an exchange rate, usually the exchange obtained on the parallel market.
There are two sources of foreign exchange in Zimbabwe for households and firms that do not generate or earn foreign currency from their activities. There is the formal channel that involves the foreign exchange auction system where households and firms submit their bid for hard currency on a weekly basis and this foreign exchange is allocated to successful bids as and when the actual cash is available.
Hard currency is not always available on the auction and this has seen a backlog arise and resulted in firms looking to the parallel market to source hard currency to sustain their operations. Exchange rates on the parallel market range between ZWL$ 170 to ZWL$ 200 whereas on the auction the exchange rates are circa ZWL$ 105.
The exchange rates translate to high prices of goods and services for final consumers. Prices of goods have continued their upward trajectory despite pronouncements by the treasury that inflation is easing. Citizens who draw their earnings in local currency would never countenance the assertion that inflation is reducing.
The informal sector of the economy hardly trades in local currency and this sector is rapidly eclipsing the formal sector. Other circles of society expect that the national budget statement will provide a balance between the need to develop and grow the economy inconsistent with the National Development Strategy (NDS 1) to maintain and sustain stability.
Treasury is expected to continue its trajectory f fiscal consolidation and discipline together with increasing incentives to grow investments in value chain sectors and stability in power supply.
On the taxation front, the budget was expected to provide relief to the poor who make up at least 49.9 per cent of the population of the country. This is particularly significant because it has been said on several occasions that Zimbabwean people are among the most taxed in southern Africa.
This is partly the legacy of the minister of finance’s austerity for prosperity policy which resulted in a largely resented 2 per cent transfer tax on all transactions. There have been calls for this tax to be repealed and the tax-free threshold to be increased.
So, did the budget statement deliver?
Drawing up the budget for the coming year must have felt like walking a tight rope. Treasury said that it received requisitions for financial allocation totalling ZWL$ 2 trillion whereas the finance minister was only able to allocate circa ZWL$ 900 billion. This development would not ordinarily portend good things in the future however the southern African country is not a stranger to be strapped for resources.
Listening to the speech made by the minister of finance on the budget statement leaves one with a feeling that Zimbabwe is slowly becoming a welfare state. A welfare state is a system where the state undertakes to protect the health and well-being of its citizens, especially those in financial or social need, by means of grants, pensions, and other benefits.
This is not patently wrong or bad. It is just not sustainable where the state in question in this case Zimbabwe does not have the financial wherewithal to provide the cushions to its citizens. The budget was characterized by themes like being for the people and with the poor at heart. All Zimbabwean people would welcome this and the reprieve it will bring.
It was not, however, as vocal on economic growth. The budget statement was presented under the theme, “Reinforcing Sustainable Economic Recovery & Resilience”.
In summary, the treasury chief expects that the economy will grow in 2022 at 5.5 per cent against what was projected to occur this year at 7.8 per cent which is 2.3 percentage points lower than this year. Treasury projects that revenue for 2022 to be at least ZWL$ 850.7 billion against the expenditure of ZWL$ 927.3 billion which will result in a deficit of at least ZWL$ 76.5 billion which the treasury says it will finance through the issuance of treasury bills.
External debt was mentioned in the statement and it stands at US$ 13.2 billion. It also included inflation statistics currently versus where they were expected to be by year-end. Treasury had forecast inflation to be between 20 per cent and 35 per cent by the end of the year however it is at 54 per cent currently.
They project inflation to come down to between 15 per cent and 20 per cent in 2022 and should finish the year at single-digit levels.
Treasury on the brighter side provided some much-needed relief to taxpayers who will now be totally exempt from taxes if their earnings range between 0 and ZWL$ 25,000.00. A 20 per cent tax will be levied on all people earning between ZWL$ 25,001.00 and ZWL$ 60,000.00. If a person earns between ZWL$ 60,000.00 and ZWL$ 120,000.00 they will pay 25 per cent in taxes, 30 per cent if they earn between ZWL$ 120,001.00 and ZWL$ 240,000.00, 35 per cent if they earn between ZWL$ 240,000.00 and ZWL$ 500,000.00 and for all those who earn ZWL$ 500,000.00 and upward a tax of 40 per cent will be levied and these tax rates are effective 1st November 2021.
The tax-free threshold for those earning salaries in US dollars was also revised upwards together with the tax-free threshold on bonuses which was revised from ZWL$ 25,000.00 to ZWL$ 100,000.00.
This will bring some cheer to citizens who are estimated to be among the most taxed in southern Africa. Also, on a good note in the country’s balance of payments and current account position which is said to be in surplus by the treasury. The surplus stands at US$ 644 million.
The surplus position is because of strong agricultural and mineral exports while exports of manufactured goods were said to be flat. Diaspora remittances played a central role in delivering the current account surplus and they are expected to reach as much as US$ 1.5 billion.
The major criticism of the budget is that it seems more preoccupied with being pro-poor. Which ordinarily is not wrong however, its focus should be on driving economic growth. The budget should have been pro-business as wealth creation and economic growth occur in the private sector.
One of the other shortcomings of the budget is that it was presented in local currency in an economy that is becoming more and more dollarized and unfortunately does not reflect realities on the ground. Given the fact that inflation is on course to finish the year at higher levels than was anticipated it makes future projections of revenue and expenditure somewhat dubious especially if they are in nominal ZWL$ terms.